Total value chain trade-offs

It can be argued that complexity is one of the most cross-functional challenges a company faces - and with it one of the most ownerless challenges, as no individual department is at point (except for the entire management team). Typically, nobody really believes that adopting complexity issues is the fastest way to the top, even when disregarding the fact that a high proportion of complexity initiatives fail to meet expectations.

The cross-functional nature of complexity is one of the most important holes in our complexity control fence. When you press on complexity on one end, it just pops up at the other. In our experience, complexity initiatives that take a truly total value chain perspective - even including parts of the customer and supplier value chains - have the most chance of meaningful impact. The further a business is away from being a pure commodity, the more important this becomes. In such cases, it often isn’t until complexity is addressed from both ends - from sales & marketing and from supply - that substantial progress can be made in establishing control over complexity.

In other words, the total value chain perspective is required to make the most important trade-offs with respect to variety and complexity. Such trade-offs affect of course the product/service/component/ingredient level of the delivery system, where they manifest themselves as the trade-off between the value of variety offered to the market and the cost of delivering it. To make such trade-offs requires understanding of the strategic intent of the firm - and the corresponding complexity control regimes - but it also requires the transparency to do so in a well founded way.

Such trade-offs also have to be considered much more structurally. For example, when is it time to break up a single delivery system into two or more specialized systems better capable of delivering the variety in more competitive ways? And if we do, will there be enough scale to do so, and if not, how could we obtain such scale? The latter question is increasingly relevant because of more and more opportunity to search for such scale through partnering, insourcing, sharing, and outsourcing.

Consider the following situation faced by a paper products company operating in a western European country. It has to deal in a market with increasing imports of low cost basic paper products from eastern Europe. The sales price of these products is uncomfortably close to the cost price of our western European company. When diving into the matter, our company finds that one of the reasons why it can’t really match the price of the new imports is the spread in variety and the complexity of offering everything from high end to basic products and delivering it all through the same delivery system. Lack of scale prevents the company from creating two specialized delivery systems. The eastern European imports, however, come from a much more specialized basic product delivery system, tapping into scale benefits by supplying multiple western European countries. Our company now faces two choices.

One option is to cut back on complexity by scrapping some of the especially high end variety offered to the market, so the delivery machine becomes better able to meet the lower cost price requirement. This delivery can be enhanced with increased automation to reduce costs even further. Although this option does provide relief, it doesn’t make the offering more interesting for the company’s clients, nor does it provide anything approaching a guarantee that the eastern European imports will not become even cheaper in the near future, wiping out all the gains of our company.

The second option is to see the eastern European imports as a major opportunity. By sourcing its basic product needs from the eastern European supplier, our company can make its own offering much more competitive - so that it gains market share - while providing the supplier with an instant and attractive volume, which would take years to develop by themselves. This option would free up the company’s own delivery system, so it could then specialize properly towards the high end, with all sorts of new value adding and distinctive services such as rush orders, custom jobs, small batches, etcetera. This route would make the company more competitive on all accounts, and if it would gain market share as a result (which it has to), it will put its competitors in an even more difficult spot.

Clearly, our company can only craft such complexity control strategies if it is willing to address the entire value chain and is willing to rethink some of its fundamental building blocks.

To ensure it is adopted, a total value chain perspective will have to be embedded in the other complexity control factors. Complexity regimes will have to cover the entire value chain. Transparency has to cut right across all the different functions in the value chain and even across the interfaces to suppliers, partners, and customers. Last but not least, Complexity Control cannot be anchored at a single point in the value chain - governance and incentives will have to ensure the entire value chain works in concerted fashion.